7

Electricity Costs

The CO₂ price and electricity demand directly affect the marginal cost of the scenarios. Distributed Energy has the highest CO₂ price and electricity demand in both timeframes, therefore the marginal cost is the highest. The cost assumptions of wind and solar, influence the CO₂ price having an effect on the Levelized cost of electricity in each market node, and the electricity marginal costs of the scenarios.

Figure 33

Figure 33: Marginal costs

Levelised cost of electricity

Across all the scenarios new capacity for electricity generation comes mainly from wind and solar power. Global trends show that incentives, innovation, and investment have matured the solar and wind industry; their levelised costs of electricity (LCOE) is significantly lower compared to other low carbon generation technologies, such as tidal or CCGTs with CCS.

A power system investment model relies on the LCOE of a particular technology to make decisions on whether it can be built. The investment model ensures that the CAPEX and fixed costs of a technology are recovered over the economic/technical lifetime of the investment. Annex II provides an over view of the investment CAPEX and fixed cost assumptions for each of the technologies considered by the scenario building process.

 Offshore
Wind
Onshore
Wind
Solar
PV
Average43 %28 %14 %
Max51 %40 %22 %
Min27 %19 %9 %

Table 5: Wind and Solar Capacity Factor Characteristics

The decision to build a particular technology is driven by the achieved electricity price for a particular market area, i. e. the weighted average price from hours when the wind/solar generator is producing, which is impacted by general supply/demand situation and the amount of previously installed capacity of the same technology. Typically in an investment model will prevent over investment in a particular technology, such as Solar PV, as similar output profiles reduce the marginal price, so that further investment is not economically viable. Furthermore, the cost and availability of flexibilities such as interconnection or storage, such as P2X and batteries, impact the investment decisions, since higher amounts of storage may improve the achieved price for variable renewable technologies.

Conventional and Renewable LCOE are variable and dependent on differing factors. The LCOE of Renewable energy sources are impacted by resource availability both in a geographical and climatic sense. The cost of technology for residential PV is typically stable across Europe however the ability to convert the energy to electric is wholly dependent on the geographical location, based on our Cost assumptions for DE2040 Spain could achieve an LCOE of ~€17/MWh compared to ~€40/MWh Finland for the same investment cost, the difference is driven entirely by the facts that a Spain PV yields approx. 22 % energy from 1MW compared to 9 % energy from 1MW in Finland.

The decision on building new conventional thermal plants is not a dependent on location, but rather the SRMC and the residual demand on the system. The decision to build new conventional plant will be based on the need to meet the residual demand and ensure security of supply for a particular market. The charts shows demonstrate that in the long term horizon renewable energy is more cost effective than thermal generation. The variability of renewable however means that backup supply is more critical, the investment decision to build thermals will rely on whether or not security of supply is highlighted in a market area and high price signals enable the building of baseload or peaking thermal plant. Typically OCGT or Light oil units will recover cost over a small number of hours whereas baseload or mid-merit plants will require a significant number of hours where the price is high enough to make an economic decision to build.

Figure 34

Figure 34: Solar PV Capacity Factor

Our analysis shows that investment in new conventional forms of energy such as nuclear and CCGTs with CCS are difficult due to the high CAPEX and the need for high operational hour’s 60-70 % of Gas CCGTs and 80-85 % for CCGT with CCS and Nuclear power plants.

Global Ambition assumes very strong cost reductions for offshore wind, with offshore wind economical competitive to onshore wind and solar PV. Distributed Energy assumes strong reduction in solar PV costs. Wind onshore is generally competitive in both scenarios. Solar PV is generally most competitive in Southern Europe, whereas onshore wind is particularly competitive in Northern and Western Europe. For offshore wind, the lowest costs take place in North Sea and southern Baltic Sea regions.

Figure 35

Figure 35: RES LCOE in Global Ambition 2040

Figure 36

Figure 36: RES LCOE in Distributed Energy 2040